Cost Risk Analysis(CRA)(CRA)

Pedram DaneshmandAssociate DirectorAssociate Director

Blue Visions Management Pty LtdJan 2011

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Content

Project Cost ManagementProject Cost ManagementRisk & OpportunitiesProject Risk ManagementCost Risk Analysis (CRA)y ( )Simulation Results ReviewCRA Fi l R tCRA Final ReportIntegrated Schedule/Cost Risk Analysis

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P j t C t M tProject Cost ManagementOverview

Every project must be managed against a budget;Every project must be managed against a budget;

Project cost controls has been around a long time;

Project Managers should liaise the budget between the client and the project team; and

More concern about how much than how long.  

Project Cost Management includes the processes required that the project can be completed within 

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the approved budget (PMBOK, 2004).

P j t C t M tProject Cost ManagementProcess

Cost Estimating – developing an approximation ofCost Estimating developing an approximation of the costs of the resources needed to complete project activitiesproject activities.

Cost Budgeting – aggregating the estimated costs of individual activities or work packages toof individual activities or work packages to establish a cost baseline.

f fCost Control – influencing the factors that create cost variances and controlling changes to the 

b dproject budget. (PMBOK, 2004)

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C t E ti tiCost EstimatingTools and Techniques

Analogous EstimatingAnalogous Estimating

Determine Resource Cost Rates

Bottom‐up Estimating

Parametric Estimating

Project Management Software

Vendor Bid AnalysisVendor Bid Analysis

Reserve Analysis

f lCost of Quality

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C t E ti ti Cost Estimating Inputs

Estimators develop the project estimate by using:Estimators develop the project estimate by using:Available organisational process assets;

Available quantities resources and productivity rates;Available quantities, resources and productivity rates;

Available work/scope statements;

Work Breakdown Structure (WBS) andWork Breakdown Structure (WBS); and

Other assumptions/documents e.g. PMP, etc.

All these add uncertainties to the estimate and reduce the confidence level. What about risks and 

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opportunities in the total project cost?

C t E ti tiCost EstimatingOutputs

The outputs of Cost Estimating process are:The outputs of Cost Estimating process are:(Deterministic) Activity Cost Estimate;

(Deterministic) Total Project Cost;(Deterministic) Total Project Cost;

(Deterministic) Cost Model Data

(Deterministic) Cost Baseline(Deterministic) Cost Baseline

(Deterministic) Resource Requirements

With all these uncertainties in the inputs and the possible risks and opportunities in the estimate, the 

i i h fid i hi i ?

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question is, how confident we are in this estimate? 

C t E ti tiCost EstimatingProject Management Software

Software like cost estimating softwareSoftware, like cost estimating software applications, computerised spreadsheets, and simulations and statistical tools are widely used tosimulations and statistical tools are widely used to assist with cost estimating.

To have a realistic estimate, Cost Estimating process should be improved by using Cost Risk Analysis (CRA).  In other words Project Cost Management and Project

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In other words Project Cost Management and Project Risk Management need to be integrated! 

C t E ti tiCost EstimatingRisks & Opportunities

Every estimate has uncertainties/assumptions.Every estimate has uncertainties/assumptions.

Every project has risks and opportunities.Eff jEffect on project(positive or negative)

Time

ScopeCostQuality

So, Risks and Opportunities should be managed effectively to minimize the surprises!!

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Q y

P j t Ri k M t Project Risk Management Process

AS/NZS ISO 31000:2009

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Establish ContextA

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Identify Risks

SME

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Analyse Risks

E l Ri k SK A

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NEvaluate Risks

Treat RisksR

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P j t Ri k M tProject Risk ManagementRisk Assessment

Risk Assessment includeRisk Assessment includeRisk Identification (both Uncertainties and Events)

Risk AnalysisRisk AnalysisQualitative

Quantitative (Cost Risk Analysis or CRA)Quantitative (Cost Risk Analysis or CRA)

Risk Evaluation

The goal is to have a better understanding of risks/ opportunities and their overall impact on total project cost This will bridges the gap between

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project cost.  This will bridges the gap between traditional cost estimating and the REAL project.

P j t Ri k M tProject Risk ManagementRisk Analysis

Risk Analysis is the process to comprehend theRisk Analysis is the process to comprehend the nature of risks (or opportunities) and to determine the level of risks (or opportunities) in the schedulethe level of risks (or opportunities) in the schedule

Risk analysis provides the basis for risk evaluation anddecisions about risk treatment; anddecisions about risk treatment; and

Risk Analysis includes risk estimation.

By Cost Risk Analysis (CRA), we model the risks and opportunities (uncertainties and events) within the complexity of the interrelationships between the

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complexity of the interrelationships between the various elements of the estimate.

C t Ri k A l iCost Risk Analysis(CRA)

CRA is a probabilistic analysis to quantify theCRA is a probabilistic analysis to quantify the impacts to a project, program or portfolio total cost as a result of carrying uncertainties and/or risksas a result of carrying uncertainties and/or risks and opportunities or to simulate the possible what‐if scenariosif scenarios. 

Relying on a accurate most likely estimate as a base, CRA takes the project cost estimating to the 

l l f d fid

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next level of accuracy and confidence.

C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Objectives

What is the project’s most likely cost?What is the project s most likely cost?

How likely is the baseline estimate to be overrun?

/Where are the risks/opportunities and the impacts (negative/positive) in this project?

How much contingency does project need?

Relying on a accurate most likely estimate as a base, CRA takes the project cost management to h l l f d fid

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the next level of accuracy and confidence.

C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Overview

Available data gatheringAvailable data gathering

Estimate Review

Technical Research

Risks & Opportunities RegisterBoth Uncertainties and Events

Cost Risk ModelCost Risk Model

Simulation

Res lts and Disc ssionsResults and Discussions

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C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Process - sample

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Data Gathering

Required information for a CRARequired information for a CRAWell‐developed project scope;

Quality estimate excluding contingency and escalation;Quality estimate excluding contingency and escalation;

Schedule reflecting the estimate;

Risk management policy/processes in your organisationRisk management policy/processes in your organisation;

Risk checklist presenting typical risks and opportunities;

Ri k & O t iti T l tRisk & Opportunities Template;

Cost Risk Templates/Models; and

S l f h d d iSample report of the process and recommendations.

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Estimate Review

How to review the deterministic estimate?How to review the deterministic estimate?Validation of all quantities (most likely);

Validation of all resource cost rates (most likely);Validation of all resource cost rates (most likely);

Validation of all durations (most likely);

Minimum number of constraintsMinimum number of constraints;

Work Statements;

C t tContract;

Reasonable duration for tasks; and

R bl C i i l P hReasonable Critical Path.

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CRA E ti t R iCRA – Estimate ReviewSample Estimate

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Technical Research

When the team is confident that the projectWhen the team is confident that the project deterministic estimate reflects the most likely case, the technical research can beginthe technical research can begin.

Historical data research

InterviewsInterviews

Internet searches, etc.

Issues may include items such as geotechnical assumptions, Environmental Approvals, material prices inclement weather productivity concerns

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prices, inclement weather, productivity concerns, existing services, contaminated material, etc. 

C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Risk Register

The Technical Research will enable the scheduleThe Technical Research will enable the schedulerisk analyst to complete the Risk Register file:

The identified risks & opportunitiesThe identified risks & opportunities

Likelihood of the identified risks and opportunities

Impacted activitiesImpacted activities

Schedule and/or Cost Impact/s

S h d l d/ C t V i tiSchedule and/or Cost Variations

Correlation of risks and opportunities to one another

N t tNotes, etc.

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Risk Register - sample

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CRA Ri k R i tCRA – Risk RegisterQuality Check

Major risks and opportunities been identified;Major risks and opportunities been identified;

The likelihood and impacts been assessed;

Risk Matrix aligned with the company’s risk management policy;

Impacts checked against the allocated calendars;

Correlations between risks been identified;;

Stage the opportunities if required; and

Duplications are minimised and addressedDuplications are minimised and addressed.

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CRA C t Ri k M d lCRA - Cost Risk ModelUncertainties & Events

Developing the Cost Risk Model involves modellingDeveloping the Cost Risk Model involves modelling the potential impacts and the likelihood of the risks and opportunities on the project and then applyingand opportunities on the project and then applying those to the schedule.

Two aspects of the risks and opportunities shouldTwo aspects of the risks and opportunities should be modelled within the schedule:

E i U i i (O i i i M Lik l dEstimate Uncertainties (Optimistic, Most Likely and Pessimistic)

Events including probabilistic branching (probability andEvents including probabilistic branching  (probability and the impacts) 

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CRA C t Ri k M d lCRA - Cost Risk ModelTypes of Cost Uncertainty

Fixed Costs (e g from $5 000 to $7 000) – alsoFixed Costs (e.g. from $5,000 to $7,000)  also spending distribution (uniform, normal, start or end) is importantend) is important. 

Resource Rate uncertainty (e.g. $500/day to $700/day)$700/day)

Resource Allocations uncertainty (e.g. from 2 )decorator crews to 5 decorator crews)

Time Dependent Costs (e.g. from 4 days to 10 days)

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CRA C t Ri k M d lCRA – Cost Risk ModelProbability Distributions

Probability Distribution is a way to indicate theProbability Distribution is a way to indicate the likelihood of values between the optimistic and pessimistic valuespessimistic values. 

Probability Distribution can be:U if (fl )Uniform (flat),

Normal (bell shaped),

( k b ll h )Beta (skinny bell shaped),

Triangle (pyramid shaped), or

Customised (user defined).

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CRA C t Ri k M d lCRA – Cost Risk ModelProbability Distributions

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CRA C t Ri k M d lCRA – Cost Risk ModelSpecial Conditions

Special conditions which needs extra attention:Special conditions which needs extra attention:Probabilistic Branching – which considers the situation where the outcome of an event can cause in two orwhere the outcome of an event can cause in two or multiple possible courses of activities.

Correlation between risksPositive Correlation: occurs when one risk goes higher, so must the other.

Negative or Adverse Correlation: occurs when one risk increases, the other must decrease. 

Inclement Weather or other external influencesInclement Weather or other external influences

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CRA C t Ri k M d lCRA – Cost Risk ModelInclement Weather

Inclement Weather can be a significant factor in aInclement Weather can be a significant factor in a project schedule and cost. Very often there is good data available but understanding the impact on thedata available but understanding the impact on the schedule is challenging.

A proper modelling will allow the team to defineA proper modelling will allow the team to define risk assessment criteria for inclement weather conditions in the schedule and include theseconditions in the schedule, and include these uncertain weather conditions in the risk analysis.

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CRA C t Ri k M d lCRA – Cost Risk ModelInclement Weather

There are two distinct ways of defining inclementThere are two distinct ways of defining inclement weather events:

Event with results in an uncertain number of nonEvent with results in an uncertain number of non working days scattered throughout a period, e.g. rain or snow.

Event with results in a single block of non working time with a probability of occurrence, e.g. chance of a hurricane in a period.

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Simulation Methods

The CRA performs multiple simulations of theThe CRA performs multiple simulations of the project using random samplings of the relevant risks and opportunities considering their probabilityrisks and opportunities considering their probability and impact.

Two popular methodsTwo popular methods:Monte Carlo Simulation (MCS) – faster method but has a larger possibility of sampling errorlarger possibility of sampling error

Latin Hypercube Sampling (LHS) – slower method but less sampling errorsless sampling errors

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Simulation Process

Analysis does the simulation through multipleAnalysis does the simulation through multiple samplings or iterations.

Each iteration is picking one sample point fromEach iteration is picking one sample point from each activity and calculating the total project cost. 

User defines the number of iteration (e.g. 1000, 5000, etc) depending on the complexity of the project and its risk model.

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Simulation Tools

Main tools been widely used for simulation are:Main tools been widely used for simulation are:@Risk

Primavera Risk Analysis (previously known asPrimavera Risk Analysis (previously known as Pertmaster)

@Risk for Project@Risk for Project

Crystal Ball

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Simulation Reports

Main reports been widely produced by CRA are:Main reports been widely produced by CRA are:Schedule Check Report (if integrated with schedule)

Total Project Contingency Analysis: against the mostTotal Project Contingency Analysis: against the most likely estimate in $. 

Sensitivity Analysis Report (or Key Risk Drivers): theSensitivity Analysis Report (or Key Risk Drivers): the areas of greatest concerns in order of criticality.

The next slides are presenting results from cost model simulations run by using @ Risk software.

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model simulations run by using @ Risk software.

C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Probability Density - sample

Confidential

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C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Sensitivity Analysis - sample

Confidential

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C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Detailed Report - sample

Confidential

Confidential

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Detailed Report - sample

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C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Detailed Report - sample

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C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Results Quality Check

After initial model a quality check is required forAfter initial model, a quality check is required forreasonableness of the simulation results.

The calculation of the contingency should beThe calculation of the contingency should bechecked against the project risk register, availableknowledge scope and estimate quality etcknowledge, scope and estimate quality, etc.

Sensitivity Report should be checked for the orderf fof high risk events and out of expected order.

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C t Ri k A l i (CRA)Cost Risk Analysis (CRA)Common mistakes

Errors within the scope development;Errors within the scope development;

Risks/opportunities correlations not considered;

/Similar risks/opportunities cause double up;

Distribution curves not evaluated right; and

Simulation problems within the model.

Because of all these reasons, it is normal to review/run the risk model several times before a confidence level 

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is achieved for the available data within the risk model. 

C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Action Plan

The accuracy of the CRA outcomes should beThe accuracy of the CRA outcomes should be improved through a number of iterations of this processprocess.

Based on the initial results, the team should:R i th i k i t d k difi ti h iReview the risk register and make modifications where require;

Make changes to the risk model accordingly;

Run the simulation again and repeat the process to achieve theRun the simulation again and repeat the process to achieve the most cost‐effective risk mitigation plan;

Finalise the Risk Action Plan as well as the Contingency Plan; and

Communicate this schedule with the team and then monitor it.

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C t Ri k A l i (CRA) Cost Risk Analysis (CRA) Final CRA Report

The Final CRA Report should include:The Final CRA Report should include:Project information including the scope;

Executive summary;Executive summary;

Report purpose, scope and background;

CRA methodology including software and teamCRA methodology including software and team;

Assumptions and market research;

Fi l Ri k/O t it R i tFinal Risk/Opportunity Register;

CRA Simulation Results, results and findings; and

Mi i i d i i lMitigation recommendations, contingency plan, etc. 

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Wh t i t?What is next?Schedule/Cost Risk Analysis

For big projects because of the reasons below anFor big projects, because of the reasons below, an integration of Schedule & Cost & Risk is required:

Schedule Cost and Risk are related;Schedule, Cost and Risk are related;

Time Dependent Costs;

Correlations between risks and opportunities; andCorrelations between risks and opportunities; and

One Schedule / Cost Risk Model for the project.

In other words Project Cost Management,  Project Time Management and Project Risk Management 

d b i d! !

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need to be integrated! !

About the Author

Pedram Daneshmand Associate DirectorPedram Daneshmand, Associate Director

Blue Visions ManagementPedram is a civil engineer with over 15 years experience in the construction industry He isPedram is a civil engineer with over 15 years experience in the construction industry. He ishighly skilled and technically proficient in many aspects of construction includingProgramming, Programme Performance Measurement, Quantitative Risk Analysis,Contract Management, Schedule Risk Analysis (SRA), Cost Risk Analysis (CRA), ProjectMonitoring & Controls (PMC) Systems, Earned Value Performance Measurementtechnique (EVPM) and POW (Program of Work) Planning & Controls.

As an industry innovation award winner for his programming and risk analysis skills,Pedram is currently an Associate Director with Blue Visions Management leading a teamof planning and controls professionals within the infrastructure sector. With more than 15articles in the professional conferences/journals he is been regularly invited to thearticles in the professional conferences/journals, he is been regularly invited to thetechnical presentations as one of the industry leaders in his field.

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